-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QGXRxVv6hxF9BHPMXvxRloegYpgpDHEMS3hbSybn+dAe3Vs0NshDKXx0wjXWf7Gl vvXDr1kCZWX/7w1tfh//jw== 0000891092-96-000196.txt : 19961113 0000891092-96-000196.hdr.sgml : 19961113 ACCESSION NUMBER: 0000891092-96-000196 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTA SYSTEMS CORP CENTRAL INDEX KEY: 0000079564 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112203988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08191 FILM NUMBER: 96658017 BUSINESS ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5163649300 MAIL ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.................to................... Commission file number 1-8191 PORTA SYSTEMS CORP. (Exact name of registrant as specified in its charter) Delaware 11-2203988 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 575 Underhill Boulevard, Syosset, New York (Address of principal executive offices) 11791 (Zip Code) 516-364-9300 (Company's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No ______ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 2,190,008 shares as of November 5, 1996 Page 1 of 17 pages PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) September 30, December 31, 1996 1995 ------------- ------------ Assets (Unaudited) ------ Current assets: Cash and cash equivalents $ 1,715 $ 1,109 Accounts receivable, net 14,700 12,626 Inventories 7,400 8,979 Prepaid expenses 528 659 Receivable from sale of discontinued operations -- 1,000 Other receivable 862 -- ------- ------- Total current assets 25,205 24,373 ------- ------- Assets held for sale, net -- 7,893 Property, plant and equipment, net 5,650 6,911 Deferred computer software, net 2,071 3,188 Goodwill, net 11,480 11,793 Other assets 4,341 6,433 ------- ------- Total assets $48,747 $60,591 ======= ======= Liabilities and Stockholders' Deficit ------------------------------------- Current liabilities: Current portion Long-term debt $ 500 $ -- Convertible subordinated debentures 2,086 6,564 Accounts payable 7,015 8,302 Accrued expenses 8,598 10,502 Accrued interest payable 493 3,534 Accrued commissions 2,338 2,016 Income taxes payable 780 780 Customer advances 251 504 Short-term loans 250 368 ------- ------- Total current liabilities 22,311 32,570 ------- ------- Long-term debt 17,328 26,645 Convertible subordinated debentures -- 25,660 Zero coupon senior subordinated convertible notes 25,909 -- Notes payable net of current maturities 3,084 3,084 Income taxes payable 811 811 Other long-term liabilities 625 385 Minority interest 803 759 ------- ------- Total long-term liabilities 48,560 57,344 ------- ------- Stockholders' deficit: Preferred stock, no par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $.01; authorized 40,000,000 and 20,000,000 shares, issued 2,190,009 and 1,492,361 shares at September 30, 1996 and December 31, 1995, respectively 22 15 Additional paid-in capital 36,537 33,308 Foreign currency translation adjustment (3,700) (4,199) Accumulated deficit (52,610) (56,074) ------- ------- (19,751) (26,950) Treasury stock, at cost (2,066) (2,066) Receivable for employee stock purchases (307) (307) ------- ------- Total stockholders' deficit (22,124) (29,323) ------- ------- Total liabilities and stockholders' deficit $48,747 $60,591 ======= ======= See accompanying notes to consolidated financial statements. Page 2 of 17 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Nine Months Ended September 30, September 30, 1996 1995 ------------- ------------- Sales $41,476 $ 47,922 Cost of sales 27,087 37,269 ------- -------- Gross profit 14,389 10,653 ------- -------- Selling, general and administrative expenses 9,578 11,573 Research and development expenses 2,681 3,853 ------- -------- Total expenses 12,259 15,426 ------- -------- Operating income (loss) 2,130 (4,773) Interest expense (4,209) (5,882) Interest income 73 48 Gain on sale of assets 2,264 -- Other income (expense) 62 (642) Income (loss) before income taxes, minority interest, discontinued operations and extraordinary item 320 (11,249) Income tax expense (28) (70) Minority interest (44) (199) ------- -------- Income (loss) from continuing operations 248 (11,518) Loss on disposal of discontinued operations -- (3,500) Income (loss) before extraordinary item 248 (15,018) Extraordinary gain 3,922 1,871 ------- -------- Net income (loss) $ 4,170 $(13,147) ======= ======== Per share data: Income (loss) from continuing operations $ 0.05 $ (7.90) ======= ======== Income (loss) before extraordinary item $ 0.05 $ (10.27) Extraordinary item 0.85 1.28 ------- -------- Net income (loss) $ 0.90 $ (8.99) ======= ======== Weighted average shares outstanding 4,618 1,461 ======= ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 17 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended September 30, September 30, 1996 1995 ------------- ------------- Sales $14,613 $14,744 Cost of sales 9,343 11,422 ------- ------- Gross profit 5,270 3,322 ------- ------- Selling, general and administrative expenses 3,391 2,839 Research and development expenses 877 1,419 ------- ------- Total expenses 4,268 4,258 ------- ------- Operating income (loss) 1,002 (936) Interest expense (983) (2,072) Interest income 31 15 Other income (expense) 44 (93) ------- ------- Income (loss) before income taxes, minority interest and extraordinary item 94 (3,086) Income tax benefit (expense) (22) (53) Minority interest (277) (42) ------- ------- Loss from continuing operations (205) (3,181) Extraordinary gain 532 -- ------- ------- Net income (loss) $ 327 $(3,181) ======= ======= Per share data: Loss from continuing operations $ (0.04) $ (2.18) ======= ======= Loss before extraordinary item $ (0.04) $ (2.18) Extraordinary item 0.10 -- ------- ------- Net income (loss) $ 0.06 $ (2.18) ======= ======= Weighted average shares outstanding 5,225 1,461 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 4 of 17 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unauditied Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30, September 30, 1996 1995 ------------ ------------- Cash flows from operating activities: Net income (loss) $ 4,170 $(13,147) Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss on disposal of discontinued operations -- 3,500 Gain on sale of assets (2,264) -- Extraordinary gain (3,922) (1,871) Non-cash financing expenses 2,089 1,031 Realized gain on litigation settlement (174) -- Depreciation and amortization 3,177 3,735 Amortization of discount on convertible subordinated debentures 94 544 Minority interest 44 199 Changes in assets and liabilities: Accounts receivable (2,074) (1,980) Inventories 1,579 3,278 Prepaid expenses 131 (314) Deferred computer software (38) (510) Other assets (184) (409) Accounts payable (1,287) 564 Accrued expenses (1,904) 1,827 Other liabilities 495 (81) ------- -------- Net cash used in operating activities (68) (3,634) ------- -------- Cash flows from investing activities: Proceeds from disposal of assets held for sale, net 6,793 -- Proceeds from sale of assets 3,456 -- Capital expenditures (246) (702) ------- -------- Net cash provided by (used in) investing activities 10,003 (702) ------- -------- Cash flows from financing activities: Proceeds from long-term debt 1,340 5,338 Repayments of long-term debt (10,157) (2,500) (Repayments of) proceeds from notes payable and short term loans (118) 469 ------- -------- Net cash (used in) provided by financing activities (8,935) 3,307 ------- -------- Effect of exchange rates on cash (394) 133 ------- -------- Increase (decrease) in cash and cash equivalents 606 (896) Cash and equivalents - beginning of the year 1,109 2,332 ------- -------- Cash and equivalents - end of the period $ 1,715 $ 1,436 ======= ======== Supplemental cash flow disclosures: Cash paid for interest expense $ 2,022 $ 2,365 ======= ======== Cash paid for income taxes $ 66 $ 41 ======= ======== See accompanying notes to unaudited consolidated financial statements. Page 5 of 17 pages NOTES TO UNAUDITIED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Management's Responsibility For Interim Financial Statements Including All Adjustments Necessary For Fair Presentation Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim periods presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's annual report to stockholders for the year ended December 31, 1995. Results for the first nine months of 1996 are not necessarily indicative of results for the year. Note 2: Computation of Per Share Earnings All share and per share information presented in the Consolidated Financial Statements and the Form 10-Q for the nine months ended September 30, 1996 gives retroactive effect to the Reverse Split described in Note 10.
Nine months ended Three months ended September 30, 1996 September 30, 1996 ------------------ ------------------ (In thousands, except per share amounts) Net income $4,170 $ 327 ====== ====== Weighted average shares outstanding 1,985 2,107 Shares of common stock contingently issuable in connection with the potential conversion of the zero coupon senior subordinated convertible notes 2,633 3,118 ------ ------ Weighted average shares outstanding-Primary 4,618 5,225 ====== ====== Earnings per share $ 0.90 $ 0.06 ====== ======
Note 3: Discontinued Operations The Company's receivable from the sale of discontinued operations was represented by shares of common stock of the entity which now owns the discontinued operations. During the quarter ended June 30, 1996, the Company sold the shares of this common stock for $3,456,000 and recorded a gain of $2,264,000. The gain represented an adjustment in the estimated value of the shares previously received and accordingly was reflected as an item in continuing operations. The receivable had previously been written down to $1,000,000 as a result of the Israeli receivership proceedings involving the purchaser of the discontinued operation. As part of an agreement with the Company's primary lender, the net proceeds from the sale of the discontinued operations were applied to reduce the outstanding principal balance of the Company's term loan. Page 6 of 17 pages Note 4: Assets Held For Sale On March 13, 1996, the Company sold certain assets and the buyer assumed certain liabilities and severance obligations related to the operations of the Company's fiber optics management and component business for $7,893,000, subject to certain adjustments. As of December 31, 1995, in conjunction with this transaction, the Company accrued approximately $700,000 for certain obligations in connection with the closing of its fiber optics facility in Ireland. These obligations were settled in the second quarter of 1996, and along with other adjustments related to the sale of the fiber business, for a positive adjustment of approximately $358,000. The difference was recorded as a reduction of selling, general and administrative expenses in the accompanying statement of operations. The Company received $6,793,000 at closing of the sale of the fiber business and the remainder was placed into two escrow funds to be released over the next year, subject to certain conditions, including a final valuation of the net assets transferred. As of September 30, 1996, the remainder, $862,000, has remained in escrow and is reported as an "Other receivable" in the accompanying consolidated balance sheet. The proceeds were primarily used to repay long-term debt. As a result of the transaction, the Company recorded a charge to operations in 1995 of $862,000 to write down the net assets sold to net realizable value. Net sales of the fiber optics business approximated $452,000 and $5,577,000 for the nine months ended September 30, 1996 and 1995, respectively. Note 5: Inventories Inventories at September 30, 1996 have been computed using a standard cost system. The composition of inventories at the end of the respective periods is as follows: September 30, 1996 December 31,1995 ------------------ ---------------- (in thousands) Parts and components $ 4,683 $ 5,370 Work-in-process 1,065 849 Finished goods 1,652 2,760 --------- --------- $ 7,400 $ 8,979 ========= ========= Note 6: Long-Term Contracts At September 30, 1996, accounts receivable included approximately $900,000 in excess costs and related profits over amounts billed relating to long-term contracts under which the Company provides specialized products to major international customers. Substantially all such amounts are expected to be billed during the remainder of 1996. Note 7: 6% Convertible Subordinated Debentures On November 30, 1995, the Company offered the holders of its 6% Convertible Subordinated Debentures due July 1, 2002 (the Debentures) an exchange of each $1,000 face amount of such debt and the elimination of the associated accrued interest payable for 19.4 shares of the Company's common stock and $767.22 principal amount of zero coupon senior subordinated convertible notes (the Notes) due January 2, 1998 (the Exchange Offer). The Notes are non-interest bearing, unsecured and have no sinking fund requirements. Page 7 of 17 pages Note 7: 6% Convertible Subordinated Debentures (continued) Each Note is convertible into common stock at a conversion price of $7.90 per share until November 1, 1996 and $6.55 per share thereafter. Accordingly, in addition to a maximum of 699,855 of common shares issuable from the exchange of the Debentures, the maximum number of shares of common stock that could be issued upon conversion, if all Debentures are exchanged, is approximately 4,225,600. The Notes are redeemable at the option of the Company at 86.71% through November 1, 1996 increasing periodically to 100% of the principal balance on November 1, 1997. Through September 30, 1996, the Company exchanged approximately $33,770,000 principal amount of the Debentures, net of unamortized discount of $3,552,000, for 655,000 shares of the Company's common stock and $25,909,000 principal amount of Notes pursuant to the Exchange Offer. The exchange of the Debentures for the Notes and common stock has been accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15 (SFAS No. 15). Since the future principal and interest payments under the Notes is less than the carrying value of the Debentures, the Notes were recorded for the amount of the future cash payments, and not discounted. Accordingly, the Company recorded an extraordinary gain on restructuring of $532,000 during the quarter and $3,922,000 for the nine months ended September 30, 1996. Additionally, in accordance with SFAS No. 15, no future interest expense will be recorded on the Notes. As of September 30, 1996, $2,086,000 of the Debentures remained outstanding, net of original issue discounts amortized to principal over the term of the debt using the effective interest rate method, of $219,000. The face amount of the outstanding Debentures was $2,305,000. Interest on the Debentures is payable on July 1 of each year. The aggregate accrued interest payable on the remaining Debentures (including amounts in arrears) was approximately $311,000 as of September 30, 1996. The Company is presently in default under the interest payment provisions of the Debentures. Accordingly, such debt has been classified as current at September 30, 1996. Note 8: Long-Term Debt At September 30, 1996, the Company's long-term debt consisted of senior debt under its credit facility with Foothill Capital Corporation in the amount of $17,828,000 of which $500,000 has been reclassified as current in accordance with the terms of the credit facility. During the quarter ended September 30, 1996 the Company repaid $198,000 of outstanding principal from the disposal of the sale of certain other assets. Financial debt covenants include an interest coverage ratio measured quarterly commencing with the quarter ending June 30, 1996, limitations on the incurrence of indebtedness, limitations on capital expenditures, and prohibitions on declarations of any cash or stock dividends or the repurchase of the Company's stock. As of September 30, 1996, the Company is in compliance with the above covenants. Page 8 of 17 pages Note 9: Legal Matters In July 1996, an action was commenced in the Supreme Court of the State of New York, New York County by certain stockholders and warrant holders of the Company who acquired their securities in connection with the acquisition by the Company of Aster Corporation against the Company and certain present and former directors. The complaint alleges breach of contract against the Company and breach of fiduciary against the directors arising out of an alleged failure to register certain restricted shares and warrants owned by the plaintiffs. The complaint seeks damages of $392,000; however, counsel for the plaintiff have advised the Company that additional plaintiffs may be added and, as a result, the amount of damages claimed may be substantially greater than the amount presently claimed. The Company believes that the defendants have valid defenses to the claims. Note 10: Capital On June 6, 1996, the stockholders of the Company approved (a) an amendment to the Company's certificate of incorporation to increase the number of authorized shares of Common Stock from 20,000,000 to 40,000,000 shares and (b) a one-for-five reverse split (the "Reverse Split") of the Company's common stock. As a result of the Reverse Split, each share of common stock outstanding at the effective time of the Reverse Split, without any action on the part of the holder thereof, became one-fifth share of common stock. The par value of the common stock was not effected by the Reverse Split. The Company has reclassified approximately $84,000 from common stock to additional paid-in capital. All share and per share data have been restated to give effect to the Reverse Split. Page 9 of 17 pages Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's consolidated statements of operations for the periods indicated below, shown as a percentage of sales, are as follows:
Nine Months Ended Three Months Ended September 30, September 30, ----------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of Sales 65% 78% 64% 77% Gross Profit 35% 22% 36% 23% Selling, general and administrative expenses 23% 24% 24% 19% Research and development expenses 7% 8% 6% 10% Operating income(loss) 5% (10%) 6% (6%) Interest expense - net (9%) (12%) (7%) (14%) Other income (expense) 5% (1%) 0% (1%) Minority interest 0% (0%) (2%) (0%) Provision for discontinued operations 0% (7%) 0% 0% Extraordinary item 9% 4% 4% (0%) Net income (loss) 10% (27%) 1% (22%)
The Company's sales by product line for the periods ended September 30, 1996 and 1995 are as follows: Nine Months Ended September 30, ----------------- 1996 1995 ---- ---- (Dollars in thousands) Line connection/protection equipment* $ 18,710 45% $ 23,051 48% OSS equipment 17,077 41% 20,995 44% Signal Processing 5,495 13% 3,519 7% Other 194 1% 357 1% -------------- --------------- $ 41,476 1 00% $ 47,922 100% ============== =============== Three Months Ended September 30, ----------------- 1996 1995 ---- ---- (Dollars in thousands) Line connection/protection equipment* $ 6,004 41% $ 6,946 47% OSS equipment 6,445 44% 6,599 45% Signal Processing 2,118 15% 1,108 7% Other 46 0% 91 1% -------------- --------------- $ 14,613 100% $ 14,744 100% ============== =============== *Includes sales of fiber optics products of $452 and $0 for the nine months and three months ended September 30, 1996 and $5,577 and $1,893 for the nine months and three months ended September 30, 1995, respectively. Page 10 of 17 pages Financial Condition The Company's working capital changed from a deficit of $8,197,000 at December 31, 1995 to a positive $2,894,000 at September 30, 1996. The reduction is primarily the result of the sale of the fiber optics business which provided the Company with funds to reduce certain of its current liabilities, the conversion of approximately 94% of the 6% convertible subordinated debentures which reduced approximately $2,591,000 of accrued interest expense and the sale of stock issued in respect of the sale of discontinued operations which was used to reduce its obligations to its senior lender. During the quarter ended June 30, 1996, the Company received $3,456,000 from the sale of common stock issued in respect of the obligations of the purchaser of discontinued operations. A gain of $2,264,000, net of related expenses, was recorded. The receivable had previously been written down to $1,000,000 as a result of the Israeli receivership proceedings involving the purchaser of the discontinued operation. The net proceeds were applied to reduce the outstanding principal balance of the Company's long-term loan with its senior lender. In March 1996, the Company's loan and security agreement with its senior secured lender, Foothill Capital Corporation ("Foothill"), was amended. Pursuant to the amendment, the Company's obligations were extended from November 1996 to November 1998 and defaults at December 31, 1995 and through the date of the amendment, were waived by Foothill. As a result the Company's indebtedness to Foothill has been classified as a long-term liability. As part of the consideration to Foothill for the amendment, the Company is obligated to pay a monthly facility fee of $50,000 commencing November 30, 1996. The Company's obligations to Foothill are secured by substantially all of the assets of the Company and its subsidiaries. The agreement with Foothill requires the Company to continue to meet certain financial covenants. At September 30, 1996, the Company is in compliance with its covenants under the agreement. On November 30, 1995, the Company offered the holders of its 6% Convertible Subordinated Debentures due July 1, 2002 (the Debentures) an exchange of such debt for common stock and zero coupon senior subordinated convertible notes (the Notes) due January 2, 1998. The exchange ratio is 19.4 shares of common stock and $767.22 of principal of Notes in exchange for $1,000 principal amount of Debentures. Accrued interest on the Debentures would also be eliminated. As of September 30, 1996, approximately $33,770,000 principal amount of the Debentures, net of unamortized discount of $3,552,000 have been exchanged for 655,000 shares of the Company's common stock and $25,909,000 principal amount of Notes pursuant to the Exchange Offer. The unsecured Notes do not bear interest and there are no sinking fund requirements. As of September 30, 1996, the Company had remaining outstanding $2,086,000 of Debentures, net of original issue discounts amortized to principal over the term of the debt using the effective interest rate method, of $219,000. The face amount of the outstanding Debentures was $2,305,000. Page 11 of 17 pages Financial Condition (continued) Interest on the Debentures is payable on July 1 of each year. The interest accrued as of September 30, 1996 amounted to $311,000. As of September 30, 1996 the Company is in default under the interest payment provisions of the Debentures for July 1, 1996 and 1995. Accordingly, such debt has been classified as a current liability at September 30, 1996. The Company has no past or ongoing interest obligation with respect to either the new zero coupon notes or the Debentures which were exchanged. The aggregate annual interest obligation on the Debentures which have not been exchanged at September 30, 1996 is approximately $138,000. On March 12, 1996, the Company sold certain assets and the buyer assumed certain liabilities and severance obligations related to the operations of the Company's fiber optics management and component business. Accordingly, at December 31, 1995, the net assets of the fiber optics business were reflected as "assets held for sale, net" at net realizable value, based on the terms of the sale. The net assets of the fiber optics business were sold for a total purchase price of approximately $8,000,000 of which $1,100,000 was held in escrow, subject to certain conditions, plus the assumption of approximately $1,400,000 in liabilities. The proceeds were applied to reduce the Company's obligations to Foothill in accordance with the March 1996 amendment to the Foothill agreement. As of September 30, 1996 certain claims have been resolved and funds have been disbursed from the escrow account to reduce the balance to $862,000. The sale of the fiber optics business benefited the Company by allowing it to close two facilities, with a resultant decrease in personnel and overhead costs. The sale also enabled the Company to amend and extend its agreement with Foothill, as described above, and make a significant payment to Foothill, which reduces its ongoing interest costs. Results of Operations The Company's sales for the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995 decreased $6,446,000 (13%) and the sales for the quarter ended September 30, 1996 decreased by $131,000 (1%) compared to the quarter ended September 30, 1995. The primary reason for the decrease for the nine months was the sale of the fiber optics business during the first quarter of 1996 (see note 4). OSS revenue decreased by $3,918,000 and $154,000 for the nine and three months ended September 30, 1996, respectively. This reduced volume for the nine months reflects lower levels of sales of our Korea joint venture partner, as well as reduced sales to British Telecommunications plc. The line connection/protection equipment sales for the nine months ended September 30 decreased by approximately $4,341,000 from 1995 to 1996. This decline reflected the sale of the fiber optics division in March 1996. Sales of fiber optics products were $452,000 and $5,577,000 for the nine months ended September 30, 1996 and 1995, respectively. Line connection/protection equipment revenue for the September 1996 quarter decreased approximately $942,000 as a result of a change in the product mix within this category from the same quarter last year. Copper products increased approximately $951,000 from last year's quarter. There were no fiber optic sales for the quarter ended September 30, 1996 compared to $1,893,000 of fiber sales for the quarter ended September 30, 1995 (see Note 4). Page 12 of 17 pages Results of Operations (continued) Signal processing revenue for the quarter and nine months ended September 30, 1996 increased by $1,010,000 and $1,976,000, respectively. This increase reflects higher sales volumes than for the comparable periods of 1995. Cost of sales for the nine months and the quarter ended September 30, 1996, as a percentage of sales compared to the same periods of 1995, decreased from 78% to 65% and from 77% to 64%, respectively. This improvement in gross margin is attributed to the Company's continuing efforts to reduce direct and indirect labor and overhead manufacturing costs which began late in the second quarter of 1995, and to a lesser extent, the effect of the sale of the fiber optic business as of March 1996. Selling, general and administration expenses decreased by $1,995,000 (17%) from $11,573,000 to $9,578,000 for the nine months ended September 30, 1996 compared to 1995. This decrease is due to the Company's continuing efforts to reduce costs and expenses. For the quarter ended September 30, 1996 and 1995 selling, general and administration expenses increased by $552,000 (19%). The primary reason for this increase is the write off of additional expenses related to the sale of the fiber optics business during 1996 (see Note 4). Research and development expenses decreased by $1,172,000 (30%) and by $542,000 (38%) for the nine and three months ended September 30, 1996 from the comparable periods in 1995, respectively. This reduced cost reflects the Company's efforts to streamline its operations by focusing on those projects with the highest potential for success and to a lesser extent, the elimination of those expenses related to fiber activities. As a result of the above, for the nine months ended September 30, 1996 compared to 1995, the Company had operating income of $2,130,000 versus an operating loss of $4,773,000. The Company had operating income of $1,002,000 for the quarter ended September 30, 1996 as compared to a loss of $936,000 from operations for the quarter ended September 30, 1995. The Company's operating improvement for the nine months and the quarter ended September 30, 1996, when compared to the comparable periods ended September 30, 1995, were the results of its continuing efforts to bring its costs and expenses in line with its current level of sales and the sale of the fiber optics business. Interest expense decreased for the nine months ended September 30 by $1,673,000 from $5,882,000 in 1995 to $4,209,000 in 1996. For the quarter ended September 30, interest expense decreased by $1,089,000 from $2,072,000 in 1995 to $983,000 in 1996. This change is attributable primarily to a decrease in interest expense related to the exchange of the Company's Debentures and repayment of principal to the Company's senior lender from the proceeds of the sale of the fiber business and the sale of common stock issued in respect of the sale of discontinued operations (see Notes 3 and 4). These reductions of interest expense are offset by an increase in interest expense associated with increased borrowing costs. During the nine month period ended September 30, 1996, the Company recorded a $3,922,000 gain from the early extingushment of approximately 94% of its Debentures. Of this gain, $532,000 was recognized in the third quarter of 1996 as an additional 8% of the Debentures were exchanged (See Note 8). During the nine month period ended June 30, 1995, the Company recorded an extraordinary gain of $1,871,000 arising from the Company's repurchase from its senior lender and retirement of $3,900,000 of its Debentures for approximately $2,500,000. Page 13 of 17 pages Results of Operations (continued) During the quarter ended June 30, 1996, the Company received $3,456,000 from the sale of common stock issued in respect of the obligations of the purchaser of the discontinued operations resulting in a gain of $2,264,000 (see Note 3). During the quarter ended June 30, 1995, the Company recorded a $3,500,000 loss from the sale of discontinued operations. At that time the best estimate for recovery was $1,000,000 as a result of the liquidation and receivership of the purchaser of such operations. As the result of the foregoing the Company generated net income of $4,170,000, $0.90 per share for the nine months ended September 30, 1996 compared with a net loss of $13,147,000, $8.99 per share, for the nine months ended September 30, 1995 and net income for the quarter ended September 30, 1996 of $327,000, $0.06 per share and a net loss for the quarter ended September 30, 1995 of $3,181,000, $2.18 per share. The calculation of the weighted average shares, for the period and quarter ended September 30, 1996, assumes the conversion of the Notes which are considered to be a common stock equivalent. Page 14 of 17 pages PART II- OTHER INFORMATION Item 1. Legal Proceedings. In July 1996, an action was commenced in the Supreme Court of the State of New York, New York County by certain stockholders and warrant holders of the Company who acquired their securities in connection with the acquisition by the Company of Aster Corporation against the Company and certain present and former directors. The complaint alleges breach of contract against the Company and breach of fiduciary against the directors arising out of an alleged failure to register certain restricted shares and warrants owned by the plaintiffs. The complaint seeks damages of $392,000; however, counsel for the plaintiff have advised the Company that additional plaintiffs may be added and, as a result, the amount of damages claimed may be substantially greater than the amount presently claimed. The Company believes that the defendants have valid defenses to the claims. Item 2. Changes in Securities. On November 30, 1995, the Company offered the holders of its 6% Convertible Subordinated Debentures due July 1, 2002 (the Debentures) an exchange of such debt for common stock and zero coupon senior subordinated convertible notes (the Notes) due January 2, 1998. The exchange ratio is 19.4 shares of common stock and $767.22 of principal of Notes in exchange for $1,000 principal amount of Debentures. Accrued interest on the Debentures would also be eliminated. Through September 30, 1996, the Company exchanged approximately $33,770,000 principal amount of the Debentures, net of unamortized discount of $3,552,000 for 655,000 shares of the Company's common stock and $25,909,000 principal amount of Notes pursuant to the Exchange Offer. Item 3. Defaults Upon Senior Securities. As of September 30, 1996 the Company is in default under the interest payment provisions of its 6% Convertible Subordinated Debentures due July 1, 2002. See Note 7 to the unaudited quarterly financial statements. Page 15 of 17 pages Item 5. Other Information. (a) In June 1996, the Company was advised that it is the position of the staff of the Securities and Exchange Commission (the "SEC") that the independence of the Company's prior auditors, KPMG Peat Marwick LLP, is adversely impacted by certain relationships involving the auditors and KPMG BayMark Strategies LLC and Mr. Edward R. Olson, the Company's former interim president and chief operating officer. On or about July 9, 1996, the SEC issued an order directing a private investigation of the Company. The SEC has indicated the investigation relates to the position of the SEC staff described above. The Company has been cooperating with the SEC's private investigation and has produced certain documents to the SEC. In addition, in September 1996, the Company has engaged the firm of BDO Seidman LLP as its independent public accountants for the audit of its financial statements for the year ended December 31, 1995. The audit by BDO Seidman LLP resulted in an amended Form 10-K which was filed on November 5, 1996 and reflected no change from the financial statements previously filed. (b) On August 2, 1996, the one-for-five reverse split of the common stock became effective. As a result of the reverse split, each share of common stock outstanding on such date automatically became converted into two-tenths of a share of common stock. The par value of the common stock was not affected. See Note 10 to Consolidate Financial Statements. Item 6. Exhibits and Reports on Form 8-K. A current report on form 8-K (Item 4), dated September 13, 1996, was filed. Page 16 of 17 pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTA SYSTEMS CORP. Dated November 6, 1996 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board Dated November 6, 1996 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Vice President and Chief Financial Officer Page 17 of 17 pages EX-27 2 FDS --
5 1,000 9-MOS DEC-31-1996 JAN-1-1996 SEP-30-1996 1,715 0 14,700 0 7,400 25,205 5,650 0 48,747 22,311 0 0 0 22 (22,102) 48,747 41,476 41,476 27,087 39,346 0 0 4,209 320 28 248 0 3,922 0 4,170 0.90 0.90
-----END PRIVACY-ENHANCED MESSAGE-----